If you contract with small businesses here are some things you need to know about proposed new unfair contract laws.
What is changing?
The Government has released an exposure draft of a bill will amend the Competition and Consumer Act 2010 (CCA) to extend the existing consumer unfair contract terms protections to small businesses.
Although some CCA protections already extend to business-to-business transactions (e.g. protections against unconscionable conduct and false or misleading claims), currently the unfair contract term protections are only available to consumers (not businesses).
Why is this important?
If the bill is passed, you’ll need to review the standard form contracts you use to contract with small businesses, for example, e.g. standard Terms & Conditions (T&Cs) for the supply of goods/services.
If your standard form contracts contain “unfair” terms, there’s a risk those terms could be declared void by a court (so you can’t rely on them).
What is a “small business”?
The bill defines a small business as one with a headcount of fewer than 20 employees (only employees who work on a regular or systematic basis are counted).
Is there a monetary threshold?
Yes, the law will only apply (even if the other party is a small business) if the upfront price payable under the contract is less than $100k (or $250k if the contract goes for more than one year).
For example, the law would not apply to a six-month contract with a small business (ie fewer than 20 employees) where the upfront price is $150k.
The “upfront price” means the price for the transaction which is disclosed at/before the contract, not amounts which are linked to future events (e.g. interest payments).
What is a “standard form” contract?
The law only applies to “standard form” contracts. Your contract will be presumed to be a standard form contract unless you prove otherwise. There’s no specific definition, but relevant factors include:
- Did you prepare the contract before you began discussions with the other party?
- Is it a “one size fits all” contract (possibly standard T&Cs on your website), which wasn’t amended/adapted for the specific transaction?
If the answer to these questions is “yes”, it’s likely the contract is a standard form contract.
What is an “unfair” term?
Practical examples of potentially “unfair” terms include terms which:
- Seek to stop the other party from claiming against you where you are in the wrong (eg a broad release/indemnity which purports to make you immune from claims for breach of contract, negligence etc.).
- Allow you to terminate without cause (ie “termination for convenience”).
- Allow you to terminate for only a minor breach which has no bearing on the other party’s performance of its obligations.
- Give you the discretion to extend the contract, without giving the other party reasonable notice.
- Provide for an “automatic rollover” into an extended term.
- Impose harsh penalties which aren’t linked to your actual loss (eg excessive liquidated damages or interest rates for non-payment).
- Give you discretion to decide whether or not the other party has met its obligations (eg a term which provides that completion of a specific deliverable occurs only when you say so).
The risk of a court finding that a particular term is “unfair” is increased if you have significantly more bargaining power than the small business.
You should be particularly cautious if you effectively refuse to transact with the small business unless they sign up to your standard form contract / T&Cs.
Of course, you should also make sure your standard contracts are in plain English and are clearly disclosed to (and accepted by) the other party (it’s always risky to rely on contracts which are hidden on a website or buried in “fine print”).
Which contracts are affected?
When the bill is passed (and after a six month transition period), it will apply to new small business contracts, existing small business contracts which are renewed and terms in existing small business contracts which are varied.
The new laws would commence in early/mid 2016.
What do you need to do?
Once the bill is passed, you could face practical difficulties because small businesses may seek to challenge terms in your standard form contracts on the basis that they are unfair. Ultimately, if a court finds that a term is unfair, it would be legally unenforceable.
With this in mind, you should:
- Assess whether you use standard form contracts (eg T&Cs) to contract with small businesses.
- Review your standard form contracts. Do they contain potentially unfair terms? Have you relied on such terms in the past? Where it is important to your business that a potentially unfair term is enforceable, you need to adopt strategies to increase the chances of this occurring.
- Assess whether you supply both small and medium-large business. The new laws would only apply to your standard form contracts with small businesses, so you may wish to have two different sets of T&Cs (or one set that applies differently to different sized businesses).
- Assess your procedures for obtaining acceptance of your standard form (you won’t be able to rely on your T&Cs at all, even if they are fair, if the other party hasn’t accepted them).
Many businesses will not address this issue until a dispute brings it to a head. At that stage, it would be too late to make changes to improve your chances of enforcing the relevant term.